This morning ATS Automation (ATA.TO) reported financial results that far exceeded my expectations. Overall, my feeling is still that ATA.TO remains undervalued and the stock price should increase significantly in the next year (100%) as more investors recognize that the company’s turnaround is progressing smoothly and the future outlook for the business is exceptional given the strength in solar and other alternative energy markets.

As stated in the past, the current price assigns zero value to the company’s PhotoWatt Division (solar modules, with a strong position in the market for UMG modules), and in addition undervalues the company’s main ASG business (automated manufacturing solutions – with an increasing emphasis on solar and other alternative energy markets). Briefly, I believe that the core ASG business could be worth $9 per share (less than 1X Revenue and about 10X EBITDA), while PhotoWatt could be worth about $3 per share, leading to my $12 target price for the stock.

The only negative about ATA.TO’s report today is that the company, presumably due to the PhotoWatt subsidiary, faces similar working capital issues to those confronted by other solar module manufacturers. However, since the company generated solid free cash-flow from the core ASG business, we do not expect any deterioration in the company’s balance sheet to support growth in the PhotoWatt business. Notably, at quarter end the company had $52 million in cash and about $20 million in total debt. In addition, the company fully covered it’s cap-ex requirements, including those for PhotoWatt, with current EBITDA.

Report Details
Notably, the company’s main ASG business (automated manufacturing solutions) reported over 30% top-line growth and more importantly significantly improved profitability with EBITDA margins expanding to 8.5%. My initial expectations for ASG were 7% EBITDA margins based on past history. However, new management has clearly significantly improved operating metrics at the company in a short time, and margins should continue to benefit over the next year. Additionally, revenue growth should remain strong at ASG given the company’s greatly increased backlog (Year over year, Order Backlog increased 293% in energy segment). ASG is clearly a prime beneficiary of the solar and other alternative manufacturing build out.

On the solar module front, the company’s PhotoWatt division, which is a leader in UMG modules, also reported significant revenue growth and improved profitability. I expect a spin out of PhotoWatt in the next year, which will highlight the value of this business.